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Saturday, December 13, 2014

A DAY after State Bank of India chairman Arundhati Bhattacharya's statement on December 11 that
the Cabinet’s decision to pare stake in state-owned banks will lead
to a fresh round of banking reforms, and force these financial
institutions...

to be more competitive, ratings agency Fitch on December
12 said the government's plans to reduce stakes in state-owned banks
to 52 percent by 2019 will enable these entities to exercise greater
flexibility in raising capital in the equity market.

Bhattacharya had said the government
should allow public sector banks (PSBs) to look at different
alternatives to raise funds to meet Basel-III norms, including
issuing shares with differential voting rights.

“The news that the government has
allowed PSBs to bring down govt stake to 52 per cent kicks off the
next round of reforms because for the first time there is a very
clear signal that banks can pick up funds from the market,”
Bhattacharya said at the concluding day of the Delhi Economics
Conclave.

The ratings agency said the
government's decision for dilution has not indicated a broader
privatisation initiative in the sector, and that the stakes are
unlikely to go below 51 percent in the medium term.

Thus, the rating agency said that it
expects access to core equity to remain challenging.

"As such, state-owned banks will
likely have to continue relying on additional tier 1 (AT1) hybrid
instruments to strengthen capitalisation in the short term, despite
the government's planned sell-downs," the ratings agency in its
report on the sector said.

Further, the report estimates that
Indian banks will require $200 billion capital under Basel-III norms
till 2019, of which the state-owned banks will account for around 85
percent.

The progress to strengthen capital has
been slow due to a low internal rate of capital accretion and limited
access to core equity.

Fitch said that asset quality and
earnings continue to remain stressed for most state banks
notwithstanding some signs of early recovery.

"Expectations of higher
restructuring and muted credit growth could further mean that
earnings recovery will be slow and protracted," the report said,
adding that as such, the plan to reduce government stakes may have to
wait until there is a meaningful recovery in earnings.

State banks in India accounts for
nearly 75 percent of total banking system assets but holds 90 percent
of the system's stressed loans.

Fitch added that a cyclical recovery in
FY16 should help ease the level of stressed assets, which is expected
to peak by March 2015.

“The big daddy back there is not
going to be around to give them capital as and when they need and if
they need to be competitive and want to grow, they definitely need to
look at other places for more capital,” she said.

Finance minister Arun Jaitley had earlier said
in his Budget speech that to be in line with Basel-III norms there is
a requirement to infuse Rs 2.4 lakh-crore into the banking system as
equity by 2018. “To meet this huge capital requirement, we need to
raise additional resources to fulfil this obligation,” he had said.

Bhattacharya said apart from paring
stake, the Centre also has to create a clear roadmap on how much the
banks need to do to meet the Basel-III norms.

“The writing on the wall is very
clear. There has to come a time where they have to think of
differential voting rights and banks have the freedom to raise
equity. It is time to lay out some kind of road map on how much the
banks need to do and how much support they would get,” she pointed out.